unicode is the only encoding that OpenERP can work with. The reason is that
all of OpenERP is using utf8 and thus requires full unicode support from the
db.
Latin1 is thus bound to fail. Please never use it.

Initializing the postgres cluster with the correct encoding (for those old
versions that have cluster-wide encoding) is a matter of distro + postgres. We
can help you, but it certainly is not an OpenERP bug.